So, you’re thinking of starting a business in Canada? Have you considered the best corporate structure for what you plan to do? In Canada, there are primarily four types of corporate structures: sole proprietorships, partnerships, corporations, and joint ventures. Depending on which option you choose to pursue, each structure offers distinct advantages and considerations that must be taken into account.
Sole Proprietorship
A sole proprietorship is the most simple and straightforward form of business ownership. It requires minimal paperwork and regulatory formalities, making it an attractive option for small-scale ventures and freelancers. The owner has complete control over decision-making and operations, but also bears unlimited personal liability for business debts and obligations, which may put personal assets at risk. Since the owner and business are considered one entity, income from the business is taxed as personal income for the owner, which can have important taxation implications. Additionally, if a sole proprietor chooses to operate the business under a name different from their own legal name, they may need to register the business name depending on the province or territory they are operating in. Sole proprietorships can be a practical option for individuals looking to start and operate a small business, freelance practice, or solo enterprise.
Corporation
Corporations are the most commonly used type of corporate structure in Canada. While various types of corporations exist, depending on jurisdiction (e.g. limited liability corporations, independent legal entities distinct from their owners, also called shareholders). Incorporation is more complicated and expensive in comparison to other structures but may provide valuable advantages that other structures do not. This includes limited liability protection for shareholders, greater access to capital, and certain tax advantages. The primary advantage of a corporation for most entrepreneurs is that, as a separate legal entity, a corporation helps shield the founder’s personal assets from the liabilities of the business. Corporations can also access capital markets, issue shares, and attract investors more readily than other forms of businesses. Moreover, corporations enjoy perpetual existence, ensuring continuity even through changes in ownership or management. Corporations are taxed separately from their owners and are subject to corporate income tax on their profits, which are generally taxed more favourably than personal tax rates. However, corporations entail greater regulatory requirements, such as corporate governance standards, financial reporting, and compliance with federal and/or provincial legislation like the Canada Business Corporations Act (Canada) (or the applicable provincial variant, such as the Business Corporations Act (Alberta) or the Business Corporations Act (Ontario)). Where more than one shareholder is involved in the corporation, a unanimous shareholder agreement may be required to govern various circumstances that may arise between the shareholders. Corporations are a potential choice for businesses of all sizes due to the various advantages available, but there are other considerations that may not make this the most suitable option for everyone.
Partnership
There are three primary types of partnerships in Canada: general, limited, and limited liability in most provinces. Partnerships offer a collaborative approach for businesses involving two or more individuals or entities. Similar to sole proprietorships, and depending on the type of partnership, the business owners personally own the assets involved in the operations, and they are personally responsible for any liabilities incurred in operations. Partnerships allow the partners to pool resources, share risks, and leverage complementary skills and expertise. While partnerships offer flexibility in management and decision-making, it is important for partners to establish clear agreements to address issues like profit-sharing, decision authority, and dispute resolution. General partners in partnerships face unlimited personal liability, while limited partners enjoy liability protection to the extent of their investment. Limited liability partnerships are similar to limited partnerships but are typically reserved for licensed professionals, such as lawyers and accountants. These types of partnerships are subject to their own liability and tax regimes. Partnerships are flow-through vehicles for tax purposes, and therefore profits and/or losses are allocated amongst the partners themselves, who then report them on their individual tax returns.
Partnerships are complicated and should not be entered into without comprehensive legal documentation and advice.
Joint Venture
A joint venture is a business arrangement where two or more parties come together to collaborate on a particular project or undertaking for a limited duration. These can be structured as incorporated or unincorporated arrangements. Joint ventures may be formed to achieve a specific goal, such as developing a new product, entering a new market, or completing a specific business transaction. These goals can be achieved through combining resources, expertise, and fostering synergy between the parties. As they are not governed by statute, specifics of a joint venture are generally governed by a contract between the parties. This type of business can be a powerful strategy to pursue certain opportunities, but due diligence and communication is essential.
Joint ventures are complicated and should not be entered into without comprehensive legal documentation and advice.
Conclusion
Selecting the appropriate corporate structure requires a comprehensive evaluation of factors, such as liability protection, taxation implications, operational flexibility, and growth objectives. Understanding these factors empowers business owners to make strategic choices for sustainable growth and success. Whether embarking on a solo endeavor, or collaborating with partners, Outsiders Law can help you make the best choice for you and your business. If you have further questions about the types of corporate structures or where to start, contact one of our lawyers! We look forward to assisting you.
Disclaimer
The information provided in this article is for educational purposes only. Nothing contained herein should be considered as legal, professional, or tax advice. Please contact us directly if you require legal assistance.
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